The consistent rise in petrol and diesel prices has been a cause of concern for the last few months and its impact can now be seen on consumer spending.
The consistent rise in petrol and diesel prices has been a cause of concern for the last few months and its impact can now be seen on consumer spending. According to a recent report by State Bank of India (SBI), rise in fuel prices has led to crowding out on other expenses like health. The economic wing of SBI analysed card spends which indicated that expenditure on non-discretionary health has been reduced substantially in order to accommodate increased expenditure on fuel.
“In fact such spending has more than crowded out the spending on other non-discretionary items, like grocery and utility services to such an extent that the demand for such products has significantly declined,” Dr Soumya Kanti Ghosh, group chief economic adviser at SBI said in a note. This trend seen in the earlier months of this year can be worrisome going forward. Apart from this, Ghosh highlighted that “the share of non discretionary spend on items like fuel has jumped to 75 per cent in June 2021 from 62 per cent in March 2021.” During April- May last year, the share for non-discretionary expenses had reached 84 per cent.
The trend has been observed taking in consideration of a large sample of customers on a recurring basis across all age groups and gender along with their spending that was bifurcated into non-discretionary and discretionary spends during the last few months.
It is to note that the rise in fuel prices have come at a time when many people are likely to have a higher medical spending on the back of Covid-19 infection. While fuel prices lead to crowding out expenses on health, the SBI report said households are now relying on their savings to meet their expenses.
“According to preliminary estimates by RBI, the household financial savings rate in Q3 FY21 has come down to 8.2 per cent of GDP from 21.0 per cent and 10.4 per cent in the previous two quarters. Our estimate indicates that during the second wave period (June 2021 over March 2021) the number of districts with deposits outflows might be double than the first wave,” the report said.
Meanwhile, retail inflation was recorded 6.26 per cent in June where fuel and light inflation accelerated to 12.68 per cent from 11.86 per cent in the previous, as petrol and diesel prices remained high. SBI has projected “that with every 10 per cent increase in petrol pump prices (Mumbai) there is 50 bps increase in CPI .”